Financial Structure and Stability PDF
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Financial Structure and Stability Contributions to Economics Giuseppe Gaburro (Ed.) Peter Michaelis/Frank Stähler (Eds.) Ethics and Economics Recent Policy Issues in Environmental 1997. ISBN 3-7908-0986-1 and Resource Economics 1998. ISBN 3-7908-1137-8 Frank Hoster/Heinz Welsch/ Jessica de Wolff Christoph Böhringer The Political Economy C0 Abatement and Economic 2 of Fiscal Decisions Structural Change in the European 1998. ISBN 3-7908-1130-0 Internal Market 1997. ISBN 3-7908-1020-7 Georg Bol/Gholamreza Nakhaeizadeh/ Karl-Heinz Vollmer (Eds.) Christian M. Hafner Risk Measurements, Econometrics Nonlinear Time Series Analysis and Neural Networks with Applications to Foreign Exchange 1998. ISBN 3-7908-1152-1 Rate Volatility 1997. ISBN 3-7908-1041-X Joachim Winter Investment and Exit Decisions at the Plant Level Sardar M.N. Islam 1998. ISBN 3-7908-1154-8 Mathematical Economics of Multi-Level Optimisation Bernd Meyer 1998. ISBN 3-7908-1050-9 Intertemporal Asset Pricing 1999. ISBN 3-7908-1159-9 Sven-Morten Mentzel Real Exchange Rate Movements Uwe Walz 1998. ISBN 3-7908-1081-9 Dynamics of Regional Integration 1999. ISBN 3-7908-1185-8 Lei Delsen/Eelke de Jong (Eds.) Michael Carlberg The German and Dutch Economies European Monetary Union 1998. ISBN 3-7908-1064-9 1999. ISBN 3-7908-1191-2 Giovanni Galizzi/Luciano Venturini (Eds.) Mark Weder Vertical Relationships Business Cycle Models with Indeterminacy and Coordination in the Food System 1998. ISBN 3-7908-1078-9 1999. ISBN 3-7908-1192-0 Tor Rodseth (Ed.) Gustav A. Horn/Wolfgang Scheremet/ Models for Multispecies Rudolf Zwiener Management Wages and the Euro 1998. ISBN 3-7908-1001-0 1999. ISBN 3-7908-1199-8 Dirk Wilier Michael Carlberg The Development of Equity Capital Intertemporal Macroeconomics Markets in Transition Economies 1998. ISBN 3-7908-1096-7 1999. ISBN 3-7908-1198-X Sabine Spangenberg Karl Matthias Weber The Institutionalised Transformation Innovation Diffusion and Political of the East German Economy Control of Energy Technologies 1998. ISBN 3-7908-1103-3 1999. ISBN 3-7908-1205-6 Heike Link et al. Hagen Bobzin The Costs of Road Infrastructure Indivisibilities and Congestion in Europe 1998. ISBN 3-7908-1123-8 1999. ISBN 3-7908-1201-3 Helmut Wagner (Ed.) Simon Duindam Current Issues in Monetary Economics Military Conscription 1998. ISBN 3-7908-1127-0 1999. ISBN 3-7908-1203-X continued on page 250 Alexander Karmann (Editor) Financial Structure and Stability With 16 Figures and 27 Tables Springer-Verlag Berlin Heidelberg GmbH Series Editors Werner A. Müller Martina Bihn Editor Prof. Dr. Alexander Karmann Technische Universität Dresden Fakultät Wirtschaftswissenschaften Lehrstuhl Geld, Kredit und Währung Mommsenstraße 13 01062 Dresden Germany ISSN 1431-1933 ISBN 978-3-7908-1332-6 Cataloging-in-Publication Data applied for Die Deutsche Bibliothek - CIP-Einheitsaufnahme Financial structure and stability: with 27 tables / Alexander Karmann (ed.). - Heidelberg; New York: Physica-Verl., 2000 (Contributions to economics) ISBN 978-3-7908-1332-6 ISBN 978-3-642-57674-4 (eBook) DOI 10.1007/978-3-642-57674-4 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprin ting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer-Verlag Berlin Heidelberg GmbH. Violations are liable for prosecution under the German Copyright Law. © Springer-Verlag Berlin Heidelberg 2000 Originally published by Physica-Verlag Heidelberg in 2000 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Softcover Design: Erich Kirchner, Heidelberg SPIN 10779392 88/2202-5 4 3 2 1 0 - Printed on acid-free paper Preface Thisbookisintendedto coverthe issue'financial structure andstability' inanepi tome way. Itreflectsthe contributionsto aworkshop onthis subjectheld inDres den on May 21sr, 1999. The workshop was supported by Dresden University of Technology, DaimlerChrysler AG Research and Technology, and Sachsen LB whatisgratefullyacknowledged. Theworkshopwasstartingpointoftheresearchproject'stabilityofthefinancial sector: theoretical analysis and an empirical cross-country study' which is finan cially supported by Deutsche Forschungsgemeinschaft. As research assistants, Oliver GreBmann and Christian Hott did helpful supportive work during the edit ing process. Michael Graffhas made a great contributionto the book by detailed comments andcriticisms. Iam gratefulto all ofthemas well as to the participants ofthe workshop for their stimulating discussion. Last, butnot least, I am very in debtedtothe authorshavingcontributedtothisbookbytheirsubstantialwork. AlexanderKarmann DresdenlFigino,June2000. Table ofcontents Financialsystems: Whatcanwelearnfromthepast? 1 Introductiontothebook AlexanderKarmann PartI: Financial stabilityand globalization 9 Evolutionoffmandal systems: 11 Convergencetowardshigherorlowerstability? DorisNeuberger Effectsofglobalizationonnationalmonetarypolicy 34 Helmut Wagner DiscussionofHelmutWagner's 53 "Effectsofglobalizationonnationalmonetarypolicy" Wi/friedFuhrmann Arewefacing astockmarketbubble? 57 David1. Fand DiscussionofDavidI. Fand's "Arewefacing astockmarketbubble?" 79 Hans Wiesmeth WhatexplainstheAsianbalanceofpaymentscrisis? 83 A simplethird-generationapproach MichaelFrenkel CausesandconsequencesoftheAsianeconomiccrisis 104 TimothyM Devinney VIII Functions ofeconomic policyin promotingthe efficiency 119 ofthe internationalfmancial system WolfgangFile DiscussionofWolfgangFile's 132 "Functionsofeconomicpolicy in promotingthe efficiency ofthe internationalfmancial system " BernhardEekwert PartII: Bankingsystems and restructuring 137 Universal banks- Areconsideration 139 Vincenz Timmermann Efficiencyofthe bankingsystem: The Italiancase 148 GianandreaGoisis DiscussionofGianandreaGoisis's 169 "Efficiencyofthebankingsystem: The Italiancase" HermannLocarek-Junge Institutionalchanges ineconomies intransition 174 andstabilityofthe bankingsystem ChuluunbaatarEnkhzaya DiscussionofChuluunbaatarEnkhzaya's 184 "Institutionalchanges ineconomies intransition andstabilityofthebankingsector" Jan K. Solarz Centralbankingandfinancial stabilityin transitioneconomies 186 Jens Holscher PartIII: Public sectorbanks 201 The Saxonsavingsbanksassociation: Saxony'sresponseto 203 the challengesposed bycompetition in thebankingsector GeorgMilbradt Processofchangewithinthe universalbankingsystem inEurope 212 Michael Weiss IX Publicsectorbanks- hnportanceandrestructuring 214 DiscussionofGeorgMilbradt's "TheSaxonsavingsbanksassociation" BerndSchips PartIV: Quantitativeexplorationsin financial systems 219 Causallinksbetweenfmancial activityandeconomicgrowth: 221 Evidencefromtwo-wavemodelestimations MichaelGraff Sovereignrisk,reserves,andimplicitdefaultprobabilities: 232 Anoptionbasedspreadanalysis AlexanderKarmann Notesoncontributors 245 Financial systems: What can we learn from the past? Introduction to the book AlexanderKannann DresdenUniversityofTechnology,D-01062Dresden,Germany 1 Onfinancial systems What canwe learnfrom empirical as well as theoretical analysis offinancial sys tems, differing cross-sectionallyand changing structurallyover time, with respect to the issue ofstability offmancial systems? Thisis the basic question underlying thecontributionstothisbook. In historical perspective, two generic types offinancial systems can be identi fied, whichwe observetoday indifferent multifacetedmixtures: banking-oriented and market-oriented systems. Both prototypes provide their own institutional an swers for anumber ofissues like economies ofscale (branches versus funds), in fonnational asymmetries (infonnation acquisition versus external rating; incom plete contracts: delegated monitoring versus votingrights). So, the question arises which system is more appropriate ina specific environment, ata specific stage of development ina specific environment. Theissuetouches ona number ofpresent todayfeatures likeglobalization, crisesand bubbles, transitioneconomies or bank restructuring. The answers to this questionare given in tenns ofefficiency and in tenns ofstability. More precisely, we can focus on cost aspects (technological ef ficiency), on the allocational outcome (Pareto efficiency), on the informational content ofprices (infonnational efficiency). And/or, we may think ofasset price dynamics(stabilityofprices) orintertemporalrisksharing(stabilityofcontractual relationships). Havingspecifiedtheeconomictenns in whichthe analysis shall be carriedout, thesolutionto the problem ofan 'optimal' financial structuretypically depends on the weights in the social welfare function attached to the parties in volved, reflecting shareholder's protection or stakeholder's protection. Standard results, as shown inBOOTAND THAKOR (1997) e.g., suggest that market-oriented financial systems provide better short tenn cross-sectional risk sharing and a higher degree ofinfonnational efficiency, whereas bank-oriented systemsprovide better intertemporal risk sharing and a superiorresolution to moral hazard behav iour ofdebitors. Both types ofsystems have their weaknesses. While the first is strongly exposed to (changes in) expection dynamics, the latter is vulnerable to contagionresulting from infonnational asymmetries. The potential deficiencies of anyofthesesystemsarethestartingpointinthe discussiononregulationoffinan cialinstitutionsandmarkets. 2 The bookisdividedintofour sections. Thefirst onedeals withstability issues in a globalizing fmancial world and addresses topics ofconvergence, domestic pol icy, financial bubbles, crises and international coordination. The second section is on banking systems. Country specific adoption and restructuringof(universal but also separation) banking systems are key problems for the industrialized econo mies, while catching-up is ofmajor concern for the economies in transition. Fee ble regional economies and subsidizedbanking is atthe heart ofthe vivid dispute on public sectorbankingbeingtaken up inthethirdsection. The lastsection isde voted to resource-oriented approaches in quantifying financial development and riskofsovereigndefault. Wesummarizethemain findings andtheirrelation tothe ongoing debate on international coordination and regulation in the next subsec tions. 2 On stability,globalization,and coordination The effects ofglobalization are far reaching. Expandingthe global market system influences the evolution of bank-oriented as well as market-oriented financial systems, questions existing monetary policy rules, may enforce the separation of asset price formation from real development, and demands for redirection ofpol icy as well as co-ordination rules to react on political, economic or financial risk andcontagious financial turmoil. In her contribution, NEUBERGER (this volume) focuses on the evolution offi nancial systemscharacterizedas highly path dependent in reflecting national pref erences. But there are significant signs ofconvergence due to growing interna tional capital mobility, increased competition of legal environments including regulation and harmonization ofrules. On the one hand, tendencies towards con vergency to market-oriented financial systems can best be illustrated by securiti zation instruments. Asset backed securities, for example, allow to transform non tradeable bankcreditsto marketable financial claims. Onthe otherhand, there is a certain convergence towards universal-bank-oriented systems by harmonizing prudential rules and banking supervision. Closer analysis indicates that this con vergence improves allocation efficiency of financial markets, but at the cost of weaknesses inherent to market-oriented systems, as described by terms like non conformingasset price dynamics, and thereby threatens the second goal, stability. NEUBERGER takes a skeptic view whether harmonization in terms of uniformly regulatedsystemsisagoodadviceto enhance stability. WAGNER (this volume) takes a more optimistic view concerning the effective ness ofnational monetary policy in a world ofgrowing economic interdependen cies. Not withstanding to admit weaker abilities for traditional stabilization policy due to looser links in the monetary transmission mechanism, he emphasizes the discipliningeffectofglobalizationto prevent inflation. In a Barro/Gordon-type of model, the result of a lower inflation bias follows, among others, from policy maker's increased risk aversion responding to increased cost ofinflation. And as coordination incentivesshouldgrow to preventcapital flights, the perceived lower inflation biaswill helptoreduce outputvolatility,too.
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